The Constitutional Dollar

If you want to limit federal spending, you must limit the ability of the federal government to print money with a gold standard.  For decades the idea was in hibernation as Americans enjoyed bubble after bubble often created by the federal reserve and loose monetary policy.

But now it seems, thanks in part to Ron Paul, the idea as taken hold.  It was remarkable to see the Wall Street Journal allow Seth Lipsky to make an effective case on the issue:

An under-reported development of this campaign season is the Republican Party’s decision this week to send Gov. Mitt Romney into the presidential race on a platform effectively calling for a new gold commission. The realization that America’s system of fiat money is part of its economic problem is moving from the fringes of political discussion to the center.

This is a sharp contrast from the last time a gold commission was convened, in 1981, a decade after President Nixon abandoned the Bretton Woods system and opened the era of a fiat dollar. The 1981 commission recommended against restoring a gold basis to the dollar. But two members—Congressman Ron Paul and businessman-scholar Lewis Lehrman—dissented and outlined the case for gold.

The new platform doesn’t use the word “gold,” describing the 1981 United States Gold Commission as looking at a “metallic basis” for the dollar. But the metal was gold, and the new platform calls for a similar commission to investigate ways “to set a fixed value for the dollar.”

What has stayed with me from 1981—I covered the commission as a young editorial writer for this newspaper—is how momentum for a new gold standard faded amid the successes of the supply-side revolution. President Reagan pushed through his tax reductions and Federal Reserve Chairman Paul Volcker maintained tight money. Inflation was defeated. The value of the dollar, which had sunk below 1/800th of an ounce of gold during President Carter’s last year in office, soared.

The 1981 commission was also stacked against a gold-backed dollar from the start. The ruling philosophy was monetarism—which, as propounded by Milton Friedman, seeks to keep prices steady by adjusting the money supply. The commission’s executive director was Anna Schwartz, co-author of Friedman’s “Monetary History of the United States,” and the Democratic-controlled House held firm to monetarist orthodoxy.

Today things have changed. Both Friedman and Schwartz died as heroes of capitalism and freedom, but monetarism lacks the sway it once had. Even Friedman before he died seemed to adjust his thinking on using the quantity of money as a target. Schwartz predicted that monetary instability would be a breeding ground for a restoration for the role of gold.

In the ferment within today’s Republican Party, the gold standard has become almost the centrist position. On the left would be those who favor a system of discretionary activism in which brilliant technocrats, such as Ben Bernanke at the Fed, use their judgment in setting interest rates. A bit to their right would be advocates of a rule, such as John Taylor’s rule linking interest rates to various conditions, or one that requires the Fed to target the price of gold but stops short of defining the dollar in terms of specie.

In the center would be advocates of a classical gold standard, in which a dollar is defined as a fixed amount of gold. These include, among others, Mr. Lehrman, James Grant of Grant’s Interest Rate Observer, publisher Steve Forbes, economist Judy Shelton, and Sean Fieler of the American Principles Project.

A bit further to the right would be partisans of the Austrian school of economics, including Rep. Paul. He advocates less for a gold standard than for an idea of Friedrich Hayek, the Nobel laureate who came to favor what he called the denationalization of money and a system centered on private coinage and currency that would compete with government-issued money. Further right are purists such as the radical constitutionalist Edwin Vieira Jr., who would simply price things in weights of gold or silver.

A good bit of overlap exists among the camps, but Congress has come alive to all points on this spectrum. Rep. Kevin Brady, a Texas Republican who is vice chairman of the Joint Economic Committee, is seeking to pass the Sound Dollar Act, which would end the Fed’s mandate to keep unemployment down, instead having the central bank focus only on stable prices. Rep. Paul is pressing the Free Competition in Currency Act, which would end legal tender and put Hayek’s ideas into practice.

In the Senate, Jim DeMint, Mike Lee and Rand Paul are offering the Sound Money Promotion Act, which would remove the tax on the appreciation in the value of gold and silver coins that have been declared legal tender by the federal or a state government. Utah has already made gold and silver coins legal tender in the state.

Then there is Mr. Romney. In Paul Ryan he chose a running mate who understands the idea of sound money. In June 2010, as chairman of the House Budget Committee, Mr. Ryan asked Mr. Bernanke what he made of record-high prices of gold. (The value of the dollar had just slid to below 1/1,200th of an ounce of gold; it has since plunged to below 1/1,600th of an ounce.)

“I don’t fully understand the movements in the gold price,” Mr. Bernanke replied. He confessed his belief that some people were hedging “against the fact that they view many other investments as being risky and hard to predict at this point.” No wonder the eventual House bill to audit the Fed passed with overwhelming bipartisan support.

This is the context in which Mr. Romney last week moved so pointedly to distance himself from a suggestion by one of his advisers, Glenn Hubbard, that Mr. Bernanke should be considered for another term. Mr. Romney made clear that he would be looking for a new Fed chairman, an important signal from a candidate who has made some mistakes—such as suggesting that monetary policy should be kept away from Congress. In fact, it is precisely to Congress that the Constitution (in Article 1, Section 8) grants the power to coin money and regulate the value thereof.

The New York Sun, the online paper I edit, has warned that a gold commission could prove to be the graveyard for sound money—on the principle that if one wants to bury an idea, one need but name a commission. But it’s possible that a well-conceived and well-staffed gold commission could actually sort out the debate.

It’s no small thing that Mr. Romney’s platform calls for a gold commission and an audit of the Fed. The last Republican to run on a platform calling for a dollar “on a fully convertible gold basis” was Dwight Eisenhower, who cast the promise aside once in office. That’s a strategic misstep for Mr. Romney, should he win in November, to avoid.

 

Obama’s Correspondence

The Gateway Pundit has hit paydirt when he discovered that President Obama sent form letters to Navy Seals killed in combat but wrote a personal letter of condolence when a rapper Heavy D passed away.

It seems like Heavy D’s family was not the only people to hear from the president in a personal manner.  So did Second Lieutenant Sandy Tsao.

Tsao thanksfully was not killed in battle.  No, it was her decision to come out of the closet that got the president to put pen to paper.  Obama wrote “Sandy – Thanks for the wonderful and thoughtful letter. It is because of outstanding Americans like you that I committed to changing our current policy. Although it will take some time to complete (partly because it needs Congressional action) I intend to fulfill my commitment. — Barack Obama” in his hand written note.

Dying for one’s country in a tragedy gets one a form letter from this administration.  Coming out of the closet gets you a personal note of encouragement.  Something is rotten in the White House.

Obama Letter

Be Like China

A common refrain among liberals is that the United States would be better off if we followed the lead of communist China.

President Obama and his green energy allies continue to argue that China is making huge investments into solar energy and hence, we should as well.  Progressive icon Elizabeth Warren, running for the Senate in Massachusetts, actually ran an ad with similar logic.

“We’ve got bridges and roads in need of repair and thousands of people in need of work. Why aren’t we rebuilding America?” asks Warren. “Our competitors are putting people to work, building a future. China invests 9% of its GDP in infrastructure. America? We’re at just 2.4%. We can do better.”

Such reasoning is faulty if one believes in the free market.

F.A. Hayek and other Austrian economists argue correctly that government investment decisions are not necessarily correct more often than not because there is no market discipline in the decision.  The “fatal conceit” of socialists is the believes that government bureaucrats can make better investment decisions than millions of people working in the confines of the free market.

There is no reason to chase China and their solar panel spending or Europe and their government-run health care spending.  Bureaucrats don’t know more than the marketplace. Never have and never will.

The Inescapable Truth of Racial McCarthyite’s

Last night on MSNBC, Lawrence O’Donnell made the outlandish claim that Senator Mitch McConnell assertion that President Obama is working harder on his golf game than on his job was racist.  O’Donnell said, ” Well, we know exactly what he’s trying to do there. He is trying to align to Tiger Woods and surely, the — lifestyle of Tiger Woods with Barack Obama. Obviously, nothing could be further from the truth.”

Of course, McConnell never mentioned the name Tiger Woods and certainly never accused to president of philandering.  That just doesn’t matter. This is the latest, but perhaps stupidest claim, that criticism of the president is racist.  We consistently are told that the GOP speak in “code words.”  Among the words with hidden meaning include: welfare, food stamp president, entitlement society, poor work ethic and amnesty.

These racial McCarthyite’s who see racists under every bed inadvertently reveal more about their view of the country than anything else.  If their “code word” theory was operative, that would mean there are millions of Americans harbor racist hate in their hearts and will respond like Pavlov’s dog when they hear words like “welfare” and “food stamps.”  They must believe large swaths of the country are red neck racist hicks and the GOP appeals to these dumbasses with these accusations.

This is just the latest example of liberals belittling the American people.  Is there any wonder most people reject their liberalism in this form?

Thomas Geoghegan — Keynesian

Churchill said a fanatic is someone who won’t change their mind and won’t change the subject.  Thomas Geoghegan and his Keynesian pals are fanatics.  Despite massive evidence that government spending does not create wealth, they continue to argue for even more spending.

In an article from Bloomberg News entitled “Obama is Lucky Medicare is Out of Control,” Geoghegan argues that out of control Medicare spending is boosting the economy.  “If Medicare was capped and couldn’t shoot up automatically, unemployment would probably be in double digits,” Geoghegan writes.

This line of faulty reasoning is not new and, in fact, permeates the minds of many of our most powerful government officials.  Nancy Pelosi argued that “Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name.”

Obama’s Secretary of Agriculture Tom Vilsack argued than Food Stamps (SNAP) creates economic growth, as well: ” I should point out, when you talk about the SNAP program or the foot stamp program, you have to recognize that it’s also an economic stimulus. Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times.”

Medicare spending is out of control.  More Americans are on Food Stamps than ever before.  And thank to these policies, unemployment, and hence, unemployment insurance spending, are at historic highs.  Shouldn’t we be the wealthiest country on earth?

History proves these individuals wrong.  The richest period in American history was not the New Deal or the Great Society but 1946 when government spending was reduced by nearly two thirds including massive cuts in military spending.

Tom Woods wrote about this: But, fashionable superstitions notwithstanding, government spending — that is, draining resources from the productive sector and devoting them to arbitrary projects — cannot improve the economy. It can only make things worse. So blinded are Keynesian economists, from whom Obama takes his inspiration, by the view that prosperity is attributable to “spending” per se that they predicted a return to depression conditions when World War II spending came to an end. And indeed in 1946, the year after the war ended, the budget was cut by two thirds. But instead of reverting to depression, what occurred instead was the single most robust year the private economy has ever seen.”

Unfortunately, both political parties are dominated by those who seek government as a salvation. For Democrats it’s social sending.  For Republicans (aka “defense socialists”) it’s military spending.   We will recover economically (if its not too late) when government gets under control, spending is reduced and government ceases to crowd out private investment and we begin to rely on the private sector and not the government for jobs.  Medicare, Food Stamps, unemployment insurance and defense spending won’t provide us our economic salvation.

 

Tragedy, Death and Keynesian Economics

On March 11, 2011 tragedy hit Japan.  A massive tsunami hit the island killing nearly 16,000 and leaving nearly 3,300 unaccounted for.  As the world mourned, Keynesian economists saw the events in a positive light.

Larry Summers, the former Harvard University President and former Secretary of the Treasury under Bill Clinton proclaimed that tsunami would bring economic renewal to Japan. “It may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength,” he said.  Don’t forget, the Kobe earthquake killed 6,000 people and left over a quarter of a million homeless.

This was not the lone raving of a madman.  Paul Krugman after the terrorist attacks on 9-11 wrote that ” like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.”

The common thread of this thinking is the belief that economic destruction, death and despair creates economic wealth by forcing the government to spend money it might not otherwise.  This is also known as the “Broken Window Fallacy.”  The great economic writer Henry Hazlett described the fallacy as:

A young hoodlum, say, heaves a brick through the window of a baker’s shop.  The shopkeeper runs out furious, but the boy is gone.  A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.  After a while the crowd feels the need for philosophic reflection.  And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side.  It will make business for some glazier.  As they begin to think of this they elaborate upon it.  How much does a new plate glass window cost?  Two hundred and fifty dollars?  That will be quite a sun.  After all, if windows were never broken, what would happen to the glass business?  Then, of course, the thing is endless.  The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum.  The smashed window will go on providing money and employment in ever-widening circles.  The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look.   The crowd is at least right in its first conclusion.  This little act of vandalism will in the first instance mean more business for some glazier.  The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death.  But the shopkeeper will be out $250 that he was planning to spend for a new suit.  Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury).  Instead of having a window and $250 he now has merely a window.  Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.  If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business.  No new “employment” has been added.  The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier.  They had forgotten the potential third party involved, the tailor.  They forgot him precisely because he will not now enter the scene.  They will see the new window in the next day or two.  They will never see the extra suit, precisely because it will never be made.  They see only what is immediately visible to the eye.

Sadly, the fallacy has become the foundation of every economic theory out there.  If government spends, it creates wealth, the Keynesians argue.  But where is government getting the money?  From taxpayers, of course, who could put the dollars to better, more efficient use.

The union bosses, the politicians (of both parties) and many businessmen looking for a fast buck only see what is immediately visible to the eye — a construction job, a green company and a sign on the highway proclaiming this project was funded by some government stimulus grant.  They fail to see the damage their program does to the economy over the long-term and ignore the debt that is created by their shortsightedness.

This brings us back to Japan.  Since the government was forced to spend billions to clean up after the tsunami, one would think their economy would be booming.  It isn’t.  Some Keynesians still argue that the rebuilding effort will lead to a short-term boost but recent signs suggest the opposite.  As Rueters recently reported, “Japan’s manufacturers’ mood dips, outlook gloomy.”  Seems like death and destruction is not the course for economic recovery.

Treat Business Equally

You won’t find a more anti-tax blog than Outside The 40.  The bottom line is the government is too big and it spends too much.  Politicians don’t need more revenue to spend.

Some conservatives oppose the Marketplace Fairness Act on those very grounds.  The Marketplace Fairness Act allows states to collect existing sales taxes for purchases made on the Internet.

Thanks to a Supreme Court decision, states can’t collect sales taxes unless a company has a “nexus” with the state.  That creates a disparity between small, neighborhood businesses and Internet retailers like Amazon.com and TigerDirect.com.  A small electronic retailer in your neighborhood has to collect and remit sales taxes but Amazon does not.  Many consumers will choose to save to money and shop online.

It’s hard enough to run a profitable small business without government imposing artificial barriers to success.

The issue of federalism is also at stake.  Whether the issue is the sales tax, immigration or medical marijuana, states should have the power to enforce their own laws without the federal government interfering.

The legislation would be better if it applied an origin-based model where sales taxes are imposed at the point of sale.

Either way, the free-rider problem must end.  Treating businesses equally should be the fundamental principle of tax policy.

The GM “Success”

President Obama will highlight his greatest domestic accomplishment at the Democrat National Convention — the bailouts of GM and Chrysler.  If this is Obama’s greatest accomplishment, we are screwed.  Michael Barone looks behind the rhetoric:

Readers with long memories may recall that Charles E. Wilson, president of General Motors and nominee for secretary of defense, got into trouble when he told a Senate committee, “What is good for the country is good for General Motors, and what’s good for General Motors is good for the country.”

That was in 1953, and Wilson was trying to make the point that General Motors was such a big company — it sold about half the cars in the U.S. back then — that its interests were inevitably aligned with those of the country as a whole.

Things are different now. General Motors’ market share in the U.S. is below 20 percent. It has gone through bankruptcy and exists now thanks to a federal bailout. But Barack Obama seems to think that it’s as closely aligned with the national interest as Wilson did.

“When the American auto industry was on the brink of collapse,” Obama told a campaign event audience in Colorado earlier this month, “I said, let’s bet on America’s workers. And we got management and workers to come together, making cars better than ever, and now GM is No. 1 again and the American auto industry has come roaring back.”

His conclusion: “So now I want to say that what we did with the auto industry, we can do in manufacturing across America. Let’s make sure advanced, high-tech manufacturing jobs take root here, not in China. Let’s have them here in Colorado. And that means supporting investment here.”

Was he calling for a federal bailout of other American manufacturing companies? And what does he mean by “supporting investment”? White House reporters have not asked these obvious questions, for the good reason that the president, who has been attending fundraisers on an average of one every 60 hours, has not held a press conference in something like two months.

Obama talks about the auto bailout frequently, since it’s one of the few things in his record that gets positive responses in the polls. But he’s probably wise to avoid probing questions, since the GM bailout is not at all the success he claims.

GM has been selling cars in the U.S. at deep discount and, while it’s making money in China — and is outsourcing operations there and elsewhere — it’s bleeding losses in Europe. It’s spending billions to ditch its Opel brand there in favor of Chevrolet, including $559 million to put the Chevy logo on Manchester United soccer team uniforms — and just fired the marketing exec who cut that deal.

It botched the launch of its new Chevrolet Malibu by starting with the green-friendly Eco version, which pleased its government shareholders, but which got lousy reviews. And it’s selling only about 10,000 electric-powered Chevy Volts a year, a puny contribution toward Obama’s goal of 1 million electric vehicles on the road by 2015.

“GM is going from bad to worse,” reads the headline on Automotive News Editor in Chief Keith Crain’s analysis. That’s certainly true of its stock price.

The government still owns 500 million shares of GM, 26 percent of the total. It needs to sell them for $53 a share to recover its $49.5 billion bailout. But the stock price is around $20 a share, and the Treasury now estimates that the government will lose more than $25 billion if and when it sells.

That’s in addition to the revenue lost when the Obama administration permitted GM to continue to deduct previous losses from current profits, even though such deductions are ordinarily wiped out in bankruptcy proceedings.

It’s hard to avoid the conclusion that GM is bleeding money because of decisions made by a management eager to please its political masters — and by the terms of the bankruptcy arranged by Obama car czars Ron Bloom and Steven Rattner.

Rattner himself admitted late last year, in a speech to the Detroit Economic Club: “We should have asked the UAW (the United Auto Workers union) to do a bit more. We did not ask any UAW member to take a cut in their pay.” Non-union employees of GM spinoff Delphi lost their pensions. UAW members didn’t.

The UAW got their political payoff. And GM, according to Forbes writer Louis Woodhill, is headed to bankruptcy again.

Is this really what Obama wants to do for all manufacturing across America? Let’s hope not.

Environmental Doom — Not

George Will recounts how environmentalists have predicted doom for generations only to see their predictions flop:

Sometimes the news is that something was not newsworthy. The United Nations’ Rio+20 conference — 50,000 participants from 188 nations — occurred in June without consequences. A generation has passed since the 1992 Earth Summit in Rio, which begat other conferences and protocols (e.g., Kyoto). And, by now, apocalypse fatigue — boredom from being repeatedly told the end is nigh.

This began two generations ago, in 1972, when we were warned (by computer models developed at MIT) that we were doomed. We were supposed to be pretty much extinct by now, or at least miserable. We are neither. So, what went wrong?

That year begat “The Limits to Growth,” a book from the Club of Rome, which called itself “a project on the predicament of mankind.” It sold 12 million copies, staggered the New York Times (“one of the most important documents of our age”) and argued that economic growth was doomed by intractable scarcities. Bjorn Lomborg, the Danish academic and “skeptical environmentalist,” writing in Foreign Affairs, says it “helped send the world down a path of worrying obsessively about misguided remedies for minor problems while ignoring much greater concerns,” such as poverty, which only economic growth can ameliorate.

MIT’s models foresaw the collapse of civilization because of “nonrenewable resource depletion” and population growth. “In an age more innocent of and reverential toward computers,” Lomborg writes, “the reams of cool printouts gave the book’s argument an air of scientific authority and inevitability” that “seemed to banish any possibility of disagreement.” Then — as now, regarding climate change — respect for science was said to require reverential suspension of skepticism about scientific hypotheses. Time magazine’s story about “The Limits to Growth” exemplified the media’s frisson of hysteria:

“The furnaces of Pittsburgh are cold; the assembly lines of Detroit are still. In Los Angeles, a few gaunt survivors of a plague desperately till freeway center strips . . .Fantastic? No, only grim inevitability if society continues its present dedication to growth and ‘progress.’”

The modelers examined 19 commodities and said that 12 would be gone long before now — aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten and zinc. Lomborg says:

Technological innovations have replaced mercury in batteries, dental fillings and thermometers; mercury consumption is down 98 percent, and its price was down 90 percent by 2000. Since 1970, when gold reserves were estimated at 10,980 tons, 81,410 tons have been mined, and estimated reserves are 51,000 tons. Since 1970, when known reserves of copper were 280 million tons, about 400 million tons have been produced globally, and reserves are estimated at almost 700 million tons. Aluminum consumption has increased 16-fold since 1950, the world has consumed four times the 1950 known reserves, and known reserves could sustain current consumption for 177 years. Potential U.S. gas resources have doubled in the past six years. And so on.

The modelers missed something — human ingenuity in discovering, extracting and innovating. Which did not just appear after 1972.

Aluminum, Lomborg writes, is one of earth’s most common metals. But until the 1886 invention of the Hall-Heroult process, it was so difficult and expensive to extract that “Napoleon III had bars of aluminum exhibited alongside the French crown jewels, and he gave his honored guests aluminum forks and spoons while lesser visitors had to make do with gold utensils.”

Forty years after “The Limits to Growth” imparted momentum to environmentalism, that impulse now is often reduced to children indoctrinated to “reduce, reuse, and recycle.” Lomborg calls recycling “a feel-good gesture that provides little environmental benefit at a significant cost.” He says that “we pay tribute to the pagan god of token environmentalism by spending countless hours sorting, storing and collecting used paper, which, when combined with government subsidies, yields slightly lower-quality paper in order to secure a resource” — forests — “that was never threatened in the first place.”

In 1980, economist Julian Simon made a wager in the form of a complex futures contract. He bet Paul Ehrlich (whose 1968 book “The Population Bomb” predicted that “hundreds of millions of people” would starve to death in the 1970s as population growth swamped agricultural production) that by 1990 the price of any five commodities Ehrlich and his advisers picked would be lower than in 1980.

Ehrlich’s group picked five metals. All were cheaper in 1990.

The bet cost Ehrlich $576.07. But that year he was awarded a $345,000 MacArthur Foundation “genius” grant and half of the $240,000 Crafoord Prize for ecological virtue. One of Ehrlich’s advisers, John Holdren, is Barack Obama’s science adviser.